It's earnings time for commercial banks again. First quarter performances will begin to be announced next Friday.
Funny isn't it, that when analysts begin to discuss bank earnings these days, the talk immediately turns to fees?
The Wall Street Journal published an article on the coming bank earnings reports, "Bank Profits Are Looking Stressed", and there is not one comment about bank lending until near the end of the article.
There are twenty-eight paragraphs in the piece and any discussion about the earnings that come from bank lending do not come until the twenty-fourth paragraph - and there is only one paragraph.
Here it is: "Analysts project net-interest revenues, or the amount banks earn on the loans they make to companies and individuals, to be flat or down slightly."
Of course, we are only talking about the biggest six "banks" in the country. That is, we are only talking about Wells Fargo (NYSE:WFC), JPMorgan Chase (NYSE:JPM), Morgan Stanley (NYSE:MS), Goldman Sachs (NYSE:GS), Citigroup (NYSE:C), and Bank of America (NYSE:BAC).
And apparently, these banks are not about lending. Lending is not where they can get exceptional returns on equity. It takes other things to make exceptional returns on equity for the biggest banks. It takes fees - fees from trading, fees from advising and consulting, fees from originations, fees for overdrawn checks, fees for about anything they can charge fees on.
The thing is, these fees are down. Bond trading has been very slow in the first quarter of 2014. Not only the thing about emerging markets issues connected with the tapering of securities purchases by the Fed. But volatility in the bond markets is down as interest rates have been moderately on the rise.
Fees for the originations of mortgages or the refinancing of mortgages are down.
From the WSJ piece: "Other consumer-loan businesses, including credit cards, also show declines…"
Furthermore, fees from investment banking may be down. There are two sides to this. According to the WSJ, banks get "fees from advising companies on mergers and from managing initial public offer offerings and other stock sales…" These may be up. But the advance here will probably be eliminated through declines connected with "the debt-capital markets business, which helps companies sell bonds and arrange bank loans."
This is what now drives returns at the largest commercial banks. And this is what we will start hearing about next Friday.
As far as the rest of the banking business, don't expect much. Banking is not doing well.
Yes, commercial and industrial loans are increasing, but they are increasing at the largest commercial banks. And, as I have written before:
"Commercial and Industrial loans increased by 9.0 percent, but it seems that the lending is not going into the most productive types of loans, the ones that would spur on economic growth. It seems as if these large banks are making loans for mergers and acquisitions and the Federal Reserve is actually telling these banks to be a little careful on how much of this lending to do. Also, a lot of the business lending at large commercial banks seems to be going to hedge funds and private equity funds that are using the money for things like the purchase of real estate, although the borrowing is through lines of credit and other business loan sources and do not show up in real estate lending category."
Another category, commercial real estate loans, is increasing, and these are primarily at the "smaller" financial institutions - that is, not the biggest banks - but these are not all that they seem.
"In earlier blogposts, I have discussed how this lending is progressing and have commented that there is a good side to this increase and a not-so-good side. The good side is that this lending is providing a floor for the commercial real estate market in that borrowers are getting support for the market as the banks are rolling-over a large portion of the debt that has existed in this area. Thus, the commercial real estate market, a market that many have been very concerned about over the past four years or so, has gotten a reprieve.
The not-so-good side of the situation is that a lot of these loans that have been refinanced were projects that were marginal earlier in the recovery and were not only rolled-over but the loans were increased to help keep the projects going and cover the further costs of the projects and to pay for some interest costs. This, from what I can see, is the reason for the rising numbers of loans outstanding. The rise in loan volume is not because of an increase in new projects being started."
And the "smaller banks, "especially the "smallest" banks, seem to have other threatening problems, like the cost of implementing all the new regulatory changes, the slow economic growth, and the cost of all the new information technology that is needed to be competitive in the industry.
The post mentioned in the last paragraph also reports that 21 percent of the banks with less than $100 million in assets posted losses in the fourth quarter of 2012, and only 50 percent of the banks in this size range posted profits, year-over-year, in the fourth quarter of 2013.
If I sound negative on the state of the banking system, I am. This is a sector that has problems and problems that are not easily overcome. From the same post:
"In terms of the FDIC data, which contains only domestically chartered banks, commercial banks with less than $100 million in asset size control less than one percent of the banking assets in the country. Banks with between $100 million and $1.0 billion in assets control a little more than 7.5 percent of the banking assets of the country.
That is, the largest 540 commercial banks in the country, banks with $1.0 billion or more assets, which make up about 9.0 percent of the number of banks in the country, control almost 92 percent of the banking assets in the United States."
Going even further, according to Federal Reserve data, all commercial banks in the United States, minus the largest 25 domestically chartered commercial banks and foreign-related financial institutions, control only 27 percent of the banking assets in the country.
There are fewer and fewer banks in the United States, more and more of the assets in the banking system are either held by the largest banks or foreign-related institutions, and more and more of the income of banks is coming from non-lending sources. And these non-lending sources seem to be a lot more volatile. That is the banking system we are evolving into.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.